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Mccain's (not) Secret Plan To Deregulate Health Insurance

John McCain’s campaign is crying foul this weekend, over an alleged misrepresentation of their man’s position on health care.

At issue is a statement, first publicized by Paul Krugman on Friday, in which McCain suggests that streamlining the regulation of health insurance might lead to “more vigorous nationwide competition, as we have done over the last decade in banking.” Liberal bloggers jumped all over it and, on Sunday, Barack Obama did too: “That’s right,” Obama told a North Carolina audience, “John McCain says he wants to do for health care what Washington has done for banking.”

But McCain economics adviser Douglas Holtz-Eakin says that's bogus. He says that his boss’s statement, which appeared in an actuarial magazine, was referring specifically to a proposal that would allow cross-state purchasing of health insurance. This would allow somebody in, say, New Jersey to buy coverage sold from a state like Utah.

According to Holtz-Eakin, it’s no different from what the government did for banks years ago, making possible the widespread use of automatic teller machines (ATMs). In other words, it’s got nothing whatsoever to do with today’s meltdown on Wall Street--and Obama should know better. Here's how Holtz-Eakin explained it all to the Washington Post:

If Barack Obama thinks that today's financial troubles were caused by policies which allowed Americans to use an ATM anywhere in this country, then it is better that he continue to be silent about solutions to the crisis on Wall Street,” Holtz-Eakin said. “That crisis arose from corruption and regulators asleep at the switch. It's also possible Senator Obama is simply a dishonest politician who will say anything to get himself elected and just isn't ready to be President.

Um, not exactly. It’s true that McCain’s proposal on health insurance would affect state, not federal, regulations. But on the broader point--about the likely impact of McCain’s health care proposals--Obama is absolutely correct. And the reason I can say that with confidence is a woman named Janice Ramsey.

Who is Janice Ramsey? Ramsey lives in central Florida, just north of Orlando. Back in the late 1990s, when she was in her late ‘50s, she was diagnosed with diabetes. And since Ramsey was self-employed--she was a consultant--she had trouble finding health insurance. No carrier wanted to cover her because of her pre-existing condition.

Then, one day in 2001, a company approached her with a great deal: Full coverage, even for care related to her diabetes, through a network of doctors and hospitals that included some of the region’s best. They said they could make this coverage available because they were part of a larger association, and thus able to take advantage of the same economies of scale that benefit large corporations.

Desperate for insurance, Ramsey happily signed on and paid her premiums ($365 a month). But then, a few months later, bill collectors started calling: Her insurer hadn’t been paying her bills and she owed several thousand dollars in charges. After making no headway with the carrier itself, Ramsey decided to call the state authorities--only to learn that she’d been taken in by a fraudulent carrier, never licensed to operate in the state and unable to pay its bills.

And she wasn’t alone. It turned out she was one of thousands of people around the country caught up in similar scams, all of them preying upon people in Ramsey's position--individuals who, because of pre-existing conditions, couldn’t find affordable coverage on her own.

Ramsey ended up owing $20,000--money she ended up having to pay off, on her own, while spending nearly two years without health insurance. But other scam victims ended up owing much more. Probably the most famous victim of an insurance scam was a Florida stock car driver, Pete Orr, who was diagnosed with cancer. He didn’t learn his policy was fraudulent until he’d run up $100,000 in bills. By the time he died, his widow owed $285,000 in all. (I told both of these stories, along with several others, in my 2007 book Sick.)

What does this have to do with McCain’s health care proposal? Everything. 

States are the ones who must regulate the insurance policies that carriers sell directly to individuals (as opposed to the ones large employers provide for their employees). A lot of those regulations govern the way insurers design their benefit packages and price their policies. But some of the regulations are in place to make sure carriers are both legitimate and solvent.

Enforcing those regulations is already difficult. As it is, scam artists can take advantage of loopholes to evade detection of even the most vigilant state authorities. In the case of the scams that netted Janice Ramsey and the other Floridians, insurers claimed (falsely) that they were exempt from state regulations since they were part of an association. Nobody figured out the "insurers" were fudging until it was too late.

If McCain had his way, and cross-state purchasing of individual insurance became legal, the problem would get far worse. As Georgetown's Karen Pollitz, one of the leading experts on the individual insurance market, has noted,

...consumers in California (population 36 million) who bought a policy licensed in Delaware (population 840,000) would not be protected by California law. Instead, California consumers with insurance problems would have to seek assistance from a regulator some 3,000 miles away and staffed to regulate insurance markets on a much smaller population scale.

Not surprisingly, the National Association of Insurance Commisioners opposed this idea when a Republican congressman first proposed it in 2005.

So, to sum up, gutting the regulation of health insurance--a step that McCain has repeatedly urged--would create myriad new opportunities for fraud. And average, hard-working Americans would be left holding the bag. Sound familiar? 

Oh, and by the way, that's not the only problem with the McCain proposal to allow cross-state purchasing. It would effectively render moot many existing benefit requirements, since insurers could simply relocate their headquarters to the states with the least stringent requirements--much as the credit card industry has flocked to places like Delaware and South Dakota. More about that here, via my friend Robert Gordon

--Jonathan Cohn